A4, M6-M9 Flashcards
What should be included on a requisition form for PPE acquisitions?
- description
- reason for acquisition
- amount to be charged
- probable cost
Who should approve of acquisitions?
Top management, and board of directors if over a specified high amount.
What is in the subsidiary ledger for PPE?
detailed information about each asset
What is involved in physical security controls for PPE?
Fixed assets should have identification plates or stickers.
The serial number on the fixed asset identification plates should be listed in the _____ _____.
control account
What are two other physical controls to safeguard assets from theft, destruction, or unauthorized disposition?
- periodic physical inspection of plant and equipment
- locks on rooms
What controls around internal documentation should be maintained for PPE?
written depreciation policies and records should be maintained
What controls should be in place around dispositions/retirement of assets?
(1) should be documented
(2) on a sequentially numbered work order
(3) containing evidence of proper authorization and reason for retirement
Searching for unrecorded retirements is a test of what assertion?
Existence/occurnce, because you are looking at whether those assets really still exist (belong on the books).
What is the most common procedure on the accumulated depreciation account?
recalculation
What three procedures should be performed for the completeness assertion for PPE (B/S)?
- Obtain a fixed asset schedule and agree the total to the GL
- Obtain schedule of additions and dispositions of fixed assets and agree amounts to the fixed asset schedules
- Trace a sample of actual fixed assets to the fixed asset schedule and subsidiary ledger
What procedures should be performed for the cutoff assertion for PPE (B/S)?
N/A, not a relevant assertion for BS accounts.
What two procedures should be performed for the valuation assertion for PPE (B/S)?
- Recalculate accumulated depreciation for reasonableness.
- Evaluate fixed assets for impairment by examining the entity’s docment impairment analysis.
What two procedures should be performed for the existence assertion for PPE (B/S)?
- Vouch additions to fixed assets by examining internal & external documents, and inspecting the actual assets
- Unrecorded Retirements: Select older fixed assets from the records, and locate them.
What procedure should be performed for the rights assertion for PPE (B/S)?
Examine invoices, deeds, and title documents to confirm ownership of fixed assets.
What procedure should be performed for the valuation assertion for PPE Transactions (I/S)?
- Recalculate depreciation expense amounts for reasonableness and conformity with GAAP.
- Gains and losses and removal of AD should be tested for reasonableness.
What two procedures should be performed for the completeness assertion for PPE Transactions (I/S)?
- Trace a sample of fixed asset purchase requisitions (source) to receiving reports (source) and the fixed asset subsidiary ledger (records).
- Review the related repair and maintenance expense accounts to test for completeness of asset additions (accidental expensing).
What procedure should be performed for the cutoff assertion for PPE Transactions (I/S)?
Review fixed asset purchases and dispositions shortly before and after year end for recording in the proper period.
What two procedures should be performed for the existence assertion for PPE Transactions (I/S)?
- Purchases: Vouch a sample of purchases (records) to the receiving report and vendor invoice (source).
- Dispositions: Vouch a sample of dispositions (records) to the asset retirement form and other supporting documentation (source).
What procedure should be performed for the rights/obligations assertion for PPE Transactions (I/S)?
N/A, not a relevant assertion for I/S accounts.
What procedure should be performed for the understandability assertion for PPE Transactions (I/S)?
Review lease transactions for proper classification.
What responsibility does the human resources department have in the Payroll cycle?
- hire new employees
- maintain personell records (hire date, department, salary, position)
What component of ARC is the human resources department associated with?
authorization (to employ and pay)
Who should approve pay base data (hours, sick days, vacation) for an employee? Why?
The employee’s immediate supervisor, because they can attest to whether they actually did work those hours (because they supervise them).
What should be used for timekeeping for hourly employees?
time clocks
Who prepares the payroll checks (2 potential options)?
- Service Organization
- Payroll Department
Who signs the payroll checks?
the treasurer or CFO
If a check signature plate (a stamp) is used to sign the payroll checks, what two extra controls should be in place?
- controls over access to blank checks and the check signature plates
- CFO or Treasurer should supervise the process of using the plates
Access to blank checks and check signature plates relates to which component of ARC?
custody
The payroll department is associated with which component of ARC?
record-keeping
The treasurer/CFO is associated with which component of ARC?
custody
How should checks normally be distributed to employees?
direct deposit into employee bank accounts
Who should distribute checks if they are manually distributed?
Distributed by a person who has no other payroll function.
What three things does the payroll department do?
- Compute salaries
- Create the payroll register
- Prepare unsigned checks
What tests of controls should the auditor perform for the payroll department (5)?
- Observe segregation of duties.
- Compare personell records with actual time cards and the people working in each department.
- Observe payroll distribution.
- Observe the use of time clocks.
- Test general and application controls.
When the auditor observes payroll distribution, should it be at a scheduled time or unannounced basis?
unannounced basis.
What is the goal of observing payroll distribution?
ensure that all personnell being paid are actually employed by the company
If controls over payroll are deemed to be effective, what are the two main substantive procedures performed?
(1) analytical procedures (compare budget to actual)
(2) recalculation of payroll accruals
Observing distribution of paychecks is a (test of controls/substantive test).
test of controls
What procedure is more common, observing distribution of paychecks or performing analytical procedures to compare paid amounts to budgets?
Analytical procedures, because new technology means that physical distribution is less likely.
What procedure should be performed for the completeness assertion for Payroll Accrual (B/S)?
Search for unrecorded liabilities.
What procedure should be performed for the cutoff assertion for Payroll Accrual (B/S)?
N/A, not a relevant assertion for B/S accounts.
What procedure should be performed for the valuation assertion for Payroll Accrual (B/S)?
Recalculate any year-end payroll accrual and compare to reported amount.
What procedure should be performed for the existence assertion for Payroll Accrual (B/S)?
Vouch amounts from the payroll accrual (records) to supporting documentation (time cards and employee files).
What procedure should be performed for the rights/obligation assertion for Payroll Accrual (B/S)?
Examine supporting documentation (employee file) to verify that payroll accrual is an obligation of the entity.
What procedure should be performed for the completeness assertion for Payroll Transactions (I/S)?
Trace a sample of time cards (source) to the payroll register (records).
What procedure should be performed for the cutoff assertion for Payroll Transactions (I/S)?
Examine a sample of time cards from before and after year-end and compare with the payroll report to determine whether the transactions were recorded in the proper period.
What six procedures should be performed for the valuation assertion for Payroll Transactions (I/S)?
”- Compare total recorded payroll with total payroll checks issued.
- Test extensions and footing of payroll.
- Verify pay rates and payroll deductions with employee records.
- Recalculate gross and net pay on a test basis.
- Compare payroll costs with standards/budgets.
- Recompute the mathematical accuracy of a sample of paychecks.”
What procedure should be performed for the existence assertion for Payroll Transactions (I/S)?
Vouch time on payroll summaries by selecting a sample of payroll register entries (record) and comparing with time cards and approved time reports (source).
What procedure should be performed for the rights/obligations assertion for Payroll Transactions (I/S)?
N/A, not a relevant assertion for I/S accounts.
What procedure should be performed for the understandability assertion for Payroll Transactions (I/S)?
Examine a sample of paychecks for classification into the proper expense accounts.
What are the two ways a company can obtain financing?
- acquire debt
- issue stock
Who should authorize new debt financing?
the board or managment
What controls should be in place regarding internal documentation of debt (3)?
- documentation of all financing agreements
- detailed records of long-term debt
- periodic independent verification of amounts between the ledger, details of debt, and the note holders’ records
What three things should the board of directors authorize in relation to equity?
- stock issuances
- dividend declarations
- treasury stock purchases
Where would evidence of board authorization of equity and debt transactions show up?
in the board minutes
What does a stock transfer agent do?
- ensure that stock issuances comply with the articles of incorporation
- prepares stock certificates
- maintains records of shares authorized, issued, and outstanding
What two controls should the entity have in place if a stock transfer agent is NOT used?
- periodic independent reconciliation of stock certificate book with number of shares outstanding
- officer of entity should ensure that transactions comply with the AOI and maintain the stock certificate book
Who should the auditor send confirmation request to in regards to equity?
the stock transfer agent
Are board minutes a source or record?
record
What five procedures should be performed to test the completeness assertion for Debt Balance (BS)?
”- Review board minutes for evidence of new debt, obtain new debt agreements, and trace all new debt contracts to the FS.
- Obtain list of all debt and agree to the GL.
- Inquire of management regarding new debt and off-BS transactions.
- Trace debt on bank confirmations to debt agreements and FS.
- Notes and bonds should be confirmed directly with creditors.”
What procedure should be performed to test the cutoff assertion for Debt Balance (BS)?
N/A, not a relevant assertion for B/S accounts.
What two procedures should be performed to test the valuation assertion for Debt Balance (BS)?
”- Recompute any interest payable and amortization of premiums/discounts.
- Examine new debt agreements to determine whether they are recorded at the proper amount.”
What procedure should be performed to test the existence assertion for Debt Balance (BS)?
Confirm notes or bonds directly with creditors or a custodian (Fidelity).
What procedure should be performed to test the obligations assertion for Debt Balance (BS)?
Examine note and bond agreements to verify that they are obligations of the entity.
What two procedures should be performed to test the completeness assertion for Debt Transactions (IS)?
”- Examine new debt agreements and the board minutes for evidence of new agreements.
- Review interest expense for payments to debt holders not included in the debt listing.”
What procedure should be performed to test the cutoff assertion for Debt Transactions (IS)?
Review debt activity shortly before and after year-end to ensure transactions were reported in the proper period.
What two procedures should be performed to test the valuation assertion for Debt Transactions (IS)?
”- Test a sample of debt receipts and payments for reasonableness.
- Compare interest expense to the debt balance.”
What procedure should be performed to test the existence assertion for Debt Transactions (IS)?
Verify existence of new debt by reviewing board minutes and then inspecting the agreements.
What procedure should be performed to test the obligations assertion for Debt Transactions (IS)?
N/A, not a relevant assertion for I/S accounts.
What procedure should be performed to test the understandability assertion for Debt Transactions (IS)?
Examine due dates of notes and bonds to determine whether debt should be short-term or long-term.
If there is no stock transfer agent, how should an auditor test the completeness assertion for equity balance and transactions?
Trace the stock certificate book to records.
What is unique about substantive procedures for equity balance and equity transactions?
They are combined procedures, not separated.
What procedure should be performed to test the cutoff assertion for Equity Balance and Transactions?
N/A
If an auditor discovers that the original insurance policy on plant equipment is not available for inspection, this most likely indicates that …
There is a lien on the PPE, because the lien-holder would have the original policy.
What three procedures should be performed to test the valuation assertion for Equity Balance and Transactions?
”- Recompute value assigned to stock transactions.
- Review direct entries to R/E.
- Analyze R/E account from inception (or last audit).”
What two procedures should be performed to test the existence assertion for Equity Balance and Transactions?
”- Vouch transactions during the period to board minutes.
- Stock transfer agent confirmation & inspection of stock certificate book.”
What procedure should be performed to test the rights/obligation assertion for Equity Balance and Transactions?
N/A
What two procedures should be performed to test the understandability assertion for Equity Balance and Transactions?
”- Determine whether there are any restrictions on RE from loans, agreements, or state laws.
- Inquire of any appropriations of RE.”
When control risk is low, you perform (extensive/limited) substantive testing?
limited
Where should unclaimed payroll checks be returned to?
an independent party for follow-up
Where should unclaimed payroll checks NOT be returned to?
Payroll department, because now a recordkeeping function would also have custody.
What is the best control to check whether employees were actually present and/or working during the recorded time?
Employee’s supervisor approves time cards.
What happens in a reasonableness test?
data in two or more fields are checked for consistency
What happens in a range test?
identifies amounts that fall outside a predetermined range
An auditor’s program to examine long-term debt should include steps that require
examining bond trust indentures
Observe the segregation of duties concerning personnel responsibilities and payroll disbursement relates to which assertion?
occurence/existence
Inspecting evidence related to prenumbering of payroll checks relates to which assertion?
completeness
What is the best way to prevent direct labor from being charged to manufacturing overhead?
use time tickets to record actual labor worked on production orders
Segregation of duties is best evaluated throuhg what procedure?
auditor’s observation
Payments on long-term debt should be agreed to what three (potential) documents?
cancelled checks, lendor’s monthly statement, loan agreement
What might a large amount of sales returns after year end indicate?
Company shipped more goods prior to year-end than customers authorized.
How does the movement of construction in progress (CR) to buildings (DR) affect gross PPE balance?
It does not, because CIP is part of gross PPE.
Which materiality is used in substantive testing related to particular accounts, performance materiality or overall materiality?
performance materiality
When determining whether PPE is materially misstated, should you look at the gross or net balance?
net balance
When Derek was reviewing the last quarter’s revenues, he noticed a significant upswing in sales toward the end of December. The upswing did not appear to exist in the prior year. - What assertion does this relate to?
cutoff
T/F: When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer or issuer would consider the cost of correcting the misstatements.
False, they would not consider the cost of correcting.
If the main premise of auditor’s test is to determine that the payroll amounts are accurately recorded in the footnotes, what assertion does this relate to?
valuation, allocation, and accuracy
At the end of the audit, the auditor accumulates the misstatements identified, except those that are considered ____ ____.
clearly trivial
What does clearly trivial mean?
(1) Items are inconsequential,
(2) individually AND in the aggregate,
(3) when judged by any criteria of
(4) size, nature, or circumstance
What does the auditor present to management at the end of the audit?
a summary of all the possible misstatements (excluding those that are clearly trivial)
Is the clearly trivial quantitative or qualitative?
Quantitative, the amount is set by the auditors.
What does management do with the Summary of Possible Misstatements?
Choose which ones they want to correct (accept), and put the remaining uncorrected misstatements in the Summary of Unadjusted Misstatements.
What does quantitative evaluation of the uncorrected misstatements look like?
If aggregate misstatements accumulated exceed overall materiality, it could result in a modified opinion.
What does qualitative evaluation of the uncorrected misstatements look like?
Immaterial misstatements may be deemed material.
When could immaterial (quantitatively) misstatements be considered qualitatively material?
- affect trends in profitability
- mask a change in a trend
- change a loss into income (or vice versa)
- affect compliance with loan covenants, contracts, or regulatory requirements
- increase management compensation, indicate management bias, involve fraud or illegal acts
- misclassification between certain account balances
- will have a material effect in the future
What should the auditor do if management claims that a misstatement is too costly to correct year after year?
Find out whether this is really true or management is trying to hide something.
What are examples of management bias in terms of misstatements (2)?
- selective correction of misstatements (only picking ones that make them look better)
- identifying additional entries that offset the misstatements indicated by the auditor
T/F: The auditor’s documentation includes both material and immaterial misstatements.
True
What should the auditor consider about the effect of identified misstatements on the assessment of control risk (3)?
- frequency with which misstatements occurred
- effect on other audit areas
- FS implications
What would be the JE to remove a sale on account?
DR Sales
CR A/R
When are FOB shipping point items considered to be the buyer’s inventory?
when the items are in the carrier’s truck
If inventory is on a pallet (loading dock) waiting to be loaded into a truck (FOB shipping point), is the inventory belonging to the buyer?
No, the items must be in the truck.
When are FOB destination items included in the buyer’s inventory?
when they are delivered on the doorstep
In a perpetual inventory system, what JEs are made on the date of a sale?
DR Cash or AR
CR Sales
DR COGS
CR Inventory
In a periodic inventory system, what JEs are made on the date of a sale?
DR Cash or AR
CR Sales
No COGS/Inventory entry.
What is the formula for COGS?
Beginning Inventory + Purchases - Ending Inventory
Who is a consignee? Who is a consignor?
Consignee: Holds the inventory for someone else.
Consignor: Asks someone to hold their inventory.
Who carries the inventory on their books, the consignee or the consignor?
the consignor
T/F: When evaluating misstatements, the auditor should consider the impact of both prior year uncorrected misstatements on the current year and current year misstatements on the prior year.
True.
What JE should be recorded if a major company files for bankruptcy?
DR Bad Debt Expense
CR Allowance for Doubtful Accounts
When goods are returned, what JE should be made?
DR Inventory
CR COGS
DR Sales
CR A/R
What are the three purposes of the management representation letter?
- confirm representations explicitly or implicitly given to the auditor
- indicate and document the continuing appropriateness of such representations
- reduce the possibility of misunderstanding
What is the date of the management representation letter?
the same as the date of the audit report
Who is the management representation letter addressed to?
the auditor
The management representation letter is the (first/last) piece of audit evidence obtained.
last
Who signs the management representation letter?
the CFO and CEO (members of management with overall responsibility for financial and operating matters)
What are the two labeled sections of the management representation letter?
Financial Statements
Information Provided
Which financial statements and periods are referenced in the management representation letter?
ALL financial statements and period reflected in the auditor’s report
What if the current CEO or CFO was not present for all periods? Should they still address all periods or only the ones they were present for?
They still have to address all periods.
Materiality considerations do not apply to items that are …
not directly related to the financial statement amounts
What types of items are not directly related to financial statement amounts and should be disclosed to the auditor regardless of materiality?
- all board minutes
- all financial recrds
What additional management representations should be included for an audit of ERISA plan financial statements?
- Management provided the auditor with the most current plan instrument, including all plan amendments.
- Acknowledge responsibility for administering plan and determining conformity with plan provisions.
When an ERISA Section 103(a)(3)(C) audit is conducted, what additional representations should management provide (5)?
- does not affect responsibility for the financial statements
- responsible for determining whether the audit is permissible
- investment information is prepared and certified by a qualified institution
- certification meets the DoL requirements
- certified investment information is appropriately measured, presented, and disclosed
What 7 additional representations should be included in the management representation letter for an integrated audit?
- responsibility for designing, implementing, and maintaining effective internal control over financial reporting
- evaluation of the effectiveness of entity’s IC over financial reporting
- management did not rely on auditor’s procedures for their evaluation
- all significant deficiencies and material weaknesses have been disclosed to the auditor
- whether deficiencies identified in previous engagements remain unresolved
- description of any material fraud or any fraud involving senior management/key employees
- statement of whether there were any significant changes to ICFR after the date of the report
What happens if management does not want to furnish the management representation letter?
Since this is a requirement in the audit, the auditor must (1) issue a disclaimer of opinion or (2) withdraw from the engagement.
T/F: The rep letter states that mangement is responsible for detecting fraud.
False. It says that they are responsible for the design, implementation, and maintenance of internal controls to prevent and detect fraud.
Does the management rep letter say that significant assumptions used by management in making accounting estimates are reasonable?
Yes.
The auditor should consider the implications of an act of noncompliance with laws and regulations in relation to other aspects of the audit, particularly the …
reliability of management’s representations
T/F: The management representation letter will generally state that management has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
True.
T/F: The management rep letter states that sufficient appropriate audit evidence was gathered.
False
The representation letter typically includes information in what four categories?
- Financial Statements
- Subsequent Events
- Completeness
- Recognition, Measurement, and Disclosure
T/F: Management typically makes a representation about the competency and objectivity of the internal auditors.
False.
The management representation letter should disclose knowledge of actual fraud or suspected fraud impacting the firm involving what three groups?
- management fraud
- employees with roles in IC
- (material only) any other individual
The auditor effective two-way communication with those charged with governance regarding what two things (that the auditor must say)?
- planned scope and timing of the audit
- timely observations from the audit that are relevant to the oversight of financial reporting
The auditor effective two-way communication with those charged with governance regarding what thing (that governance must say)?
information held by those charged with governance that is relevant to the audit
In which two parts of the audit process would an auditor uncover internal control deficiencies?
(1) Planning: Understand internal control.
(2) Perform: Test of controls.
What is attached to the management representation letter?
a list of the uncorrected misstatements
T/F: Management has to tell the auditor about their assessment of fraud risk.
True.
What two things can indicate a deficiency in design?
- necessary control is missing, OR
- existing control does not achieve the desired objective
What two things can indicate a deficiency in operation?
- properly designed control does not operate as designed, OR
- is performed by an inappropriate person
What are the three types of deficiencies in IC, from least worst to worst?
- Control Deficiency
- Significant Deficiency
- Material Weakness
What is the definition of a control deficiency?
(1) design or operation of a control
(2) does NOT allow management or employees
(3) in the normal course of performing their assigned functions
(4) to prevent or detect and correct misstatements
(5) on a timely basis
What is a significant deficiency (defined)?
(1) a deficiency or combination of deficiencies in ICFR
(2) that is less severe than a material weakness
(3) yet important enough to merit attention
(4) by those charged with governance
What is a material weakness (defined)?
(1) a deficiency or combination of deficiencies in ICFR
(2) such that there is a reasonable possibility
(3) that a material misstatement of the entity’s FS
(4) will not be prevented or detected and corrected on a timely basis
What four situations are indicators of material weaknesses in ICFR?
- any level of fraud perpetrated by senior management
- restatement of previously issued financials to correct a material misstatement
- identification by the auditor of a material misstatement that would not have been detected by IC
- ineffective oversight by the audit committee
If you have a potential misstatment arising from control deficiencies, what two criteria do you evaluate it on?
- likelihood
- magnitude
A control deficiency is associated with what materiality level?
less than inconsequential
A significant deficiency is associated with what materiality level?
more that inconsequential but less than material
A material weakness is associated with what materiality level?
material
In a FS audit only (nonissuer), how, who, and when should significant deficiencies be reported by the auditor?
How: Writing
Who: Management and the Board
When: Within 60 Days after the Report Release Date
In a FS audit only (nonissuer), how, who, and when should control deficiencies be reported by the auditor?
How: Orally or in Writing
Who: Management Only
When: Within 60 Days after the Report Release Date
T/F: A significant weakness or material weakness that is corrected during the audit does not need to be communicated.
False, it should still be communicated.
T/F: Previously communicated significant deficiencies and material weaknesses that have not been corrected do not need to be communicated again.
False, they should be communicated again in wrtiting by referring to the previously issued written communication and date of that communication.
When are significant deficiencies and material weaknesses usually communicated (before or after audit completion)?
after audit completion
T/F: Previously communicated control deficiencies that have not been corrected do not need to be communicated again.
True, control deficiencies do not need to be communicated again.H
Who is the addressee of the communication of control deficiencies?
Management and/or the Board of Directors
What elements are included in a communication of control deficiencies (nonissuer, FS audit)?
- date of FS reporting on
- GAAS
- goal is to express opinion on FS, not ICFR
- We do NOT express an opinion on internal controls.
- did identify some significant deficiencies and material weaknesses, but not necessarily ALL
- define deficiency and material weakness
- list material weaknesses
- define significant deficiency
- list significant deficiency
- restriction paragraph
What parties is the communication of control deficiencies restricted to?
management, those charged with governance, others within the organization, any governmental authority the auditor must report to
Can the auditor communicate that they found no material weaknesses?
Yes, but this is optional.
Can the auditor communicate that they found no significant deficiencies?
No!
In an ERISA audit, can the auditor issue a written communication that says no reportable findings were identified during the audit?
No.
T/F: The auditor should communicate issues with management, even if they were resolved.
True.
Does the SEC require that an entity has an audit committee?
No, it is recommended but not required.
Does the NYSE require that an entity has an audit committee?
Yes.
Large accounting firms strongly support the function of an ____ ____ .
audit committee
Is the definition of material weakness included in the report even when there are no material weaknesses to report?
Yes.
T/F: The auditor is required to communicate to the board the justification for any of the judgments made in conducting the audit.
False, this is not a requirement.
The auditor is not required to communicate to those charged with governance the _____ of _____ placed on the management representation letter.
degree of reliance
Insufficient control consciousness is a deficiency in (design/operation).
Design, because it represents a systemic issue within management’s attitude towards internal controls, impacting the overall design and effectiveness of the control environment.
Management override of controls is a deficiency in (design/operation).
Operation, because the control is in place but it was overriden.
Misrepresentation by client personnel to the auditor is a deficiency in (design/operation).
Operation, because the control is in place but it is just being misrepresented.
Undue bias or lack of objectivity is a deficiency in (design/operation).
Operation, because the control is in place but not being applied properly.
The identification of immaterial fraud by a member of senior management results in which of the three types of deficiencies?
material weakness
The payroll clerk created fictitious employees in order to collect unauthorized payroll checks. - Is this a deficiency in design or operation?
Design, because the payroll clerk should not be able to create fictitious employees. So, there is no control in place.
Would communication with governance include the following statement: “Our audit of the financial statements does not relieve you or management of your responsibilities.”
Yes.
